Helmut Schmidt, the former German chancellor, co-founded the annual economic
summits of the G-7 leading industrial countries with Giscard D'Estaing.

HAMBURG - Listening to the United States trade
representative these days evokes sounds of battle, of the adversary's
cunning and one's own self-righteousness. The recurring topic is automobiles
and everything is directed against Japan. Whenever dark clouds gather
over Detroit, a culprit must be found, and that culprit is Japan because
it sells many more automobiles to the US than the US sells to Japan. If
the overall trade between the two countries is in deficit for the US,
then - obviously - musn't it be Japan's fault?

In reality the US shows a trade deficit not only with
Japan but also with the rest of the world. Even in the event that Japan
were to buckle under the pressure from Washington and were to agree to
import quotas for American automobiles - something in violation of the
treaty establishing the World Trade Organization (WTO) and of the painfully
achieved results of the Uruguay Round-the structural illnesses of the
American economy would still remain untreated.

For many years now, Americans have consumed and invested
more than they produced. Their savings are insufficient. During the first
decades after the end of World War II this would have been inconceivable.
At the time the US was able to finance the Marshall Plan. Today, however,
it is dependent on foreign capital. The US dollar has fallen to one third
of its former value compared to the deutschmark.

Since the beginning of the 1980 s the US has been plagued
by towering annual deficits which can no longer be financed by the insufficient
savings of American society. This development, whose danger has been largely
underrated since the Reagan Administration, has led to a double calamity:
US imports annually exceed exports, making the US the largest debtor country
vis-à-vis the world economy by a long shot.

Every economist knows that the American trade deficit
can only be eliminated through a sizable reduction of the budgetary deficit.
This fact is also well known nowadays by politicians in both the White
House and Congress. And yet, American politicians continue to pretend
to themselves and their people that the Japanese are responsible for their
misery.

Washington's attempt to impose larger sales of American
automobiles on the Japanese constitutes a serious violation of the principle
of freedom of trade. Those who believe that punitive import duties of
100 percent on automobiles imported from Japan would give European cars
a better chance are short-sighted indeed. This trade war can spread very
rapidly. It can fast affect other areas, such as air routes, the aircraft
industry and modern information technologies, as well as the TV and movie
industries.

In short, Washington is dead wrong. Its actions can endanger
the world economy as a whole. Those Americans who, in spite of paying
lip service to the contrary, really quite like the fall of the dollar
on the currency markets because they hope for increased export through
cheaper American goods abroad, should remember this: whoever weakens the
dollar as a leading world currency will undermine America's role as a
world power in the long run.

Japan's position, however, is also unhealthy in the long
run. Over the last 15 years Japan has had the opposite problem as the
US: Its production has largely exceeded its domestic consumption and investments.
The extraordinary savings of the Japanese have turned them into the world's
largest creditor. And, no overpowering creditor will remain very popular
in the long run.

The leading officials in the Departments of Finance and
Industry and Trade (MITI) who, in reality, control the Japanese economy
have succeeded in structuring a Japanese economy oriented exclusively
toward self-restraint within and toward expansion in foreign trade. Neither
the Japanese people at large, nor even most of the politicians, seem fully
aware of this.

True, Japan has become a potential world power because
of the potential foreign-policy leverage of its overwhelming financial
strength. True, the annual interest and dividends from abroad have practically
reached one third of the annual surplus of its trade balance. True, the
Japanese foreign currency reserves have levels twice as high as those
of the US.

Yet, Japanese citizens pay for this nominal wealth with
sacrifices in consumption, especially by giving up adequate housing standards.
In actual fact, the Japanese could live much better if they were to give
up at least part of their trade surpluses, part of their foreign investments
and part of their international credit activities.

In reality, the Japanese markets are a difficult terrain
for many foreign sellers. But even if President Clinton's offensive in
the automobile trade war were successful, this would change little in
the structure of the Japanese economy which would continue to be oriented
unilaterally toward exports. A structural reform to promote domestic expansion
would in all likelihood take about one decade, about as much time as it
would take to orient American structures toward a balanced budget. Up
until now, however, neither country seems to wish such drastic reforms.

Tokyo's political leadership has not yet realized that
Japan's increasing economic strength has led to an increasingly vulnerable
foreign policy position, not only vis-à-vis its only ally, the
US, but also vis-à-vis its many neighbors in East and Southeast
Asia.

An Asian-Pacific economic entity under Japanese leadership
is even less popular with its neighbors than a European Union under a
theoretically conceivable German leadership. Japan's politicians may still
be able to hide their long -lasting weakness by manipulating their own
public opinion for a while longer, for instance by stressing strong nationalistic
feelings or by refusing to acknowledge any culpability during World War
II. In the long run, however, nothing is gained by such a policy, not
even with an overly strong Yen.

In the long run, Japan will remain dependent on a tolerable
relationship with the United States. This conflict will benefit no one
in the world. America is wrong in today's trade war, which is not to say
Japan is right. Restraint and good measure are desirable from both sides.
Both nations must realize that a structural reform of their economies
is a must.